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Saturday, March 31, 2012

The Problem with the Minimum Wage

The main argument made by those in favor of a minimum wage is that it raises the standard of living for the working poor and, thus, reduces poverty. The main argument against it is that it increases unemployment. A business owner will hire workers as long as its marginal product of labor doesn’t drop below zero. What this means is that if the owner can employ someone for $6/hour who gives him $6/hour worth of productivity, he will do so. However, if the owner is forced to pay the worker $7/hour, keeping him would actually cause the owner to lose money. Therefore, while some workers would make a marginally higher income, some would lose their jobs and make no income. Some are helped a little, while some are hurt a lot.

In addition, some of the costs borne by business owners due to higher wages will be passed on to consumers by way of higher prices. Higher prices are regressive in nature. By this, I mean the higher one’s income is, the less one is affected by higher prices. Conversely, the lower one’s income is, the more one is affected by higher prices. As a result, any price increase caused by a minimum wage will affect the very people the proponents are trying to help the most.

A third argument against a minimum wage is one not much talked about. A minimum wage essentially transfers income to unskilled workers. Normally, when the government transfers income – to help the poor or tornado victims or the Auto Industry, for example – these transfers are paid from tax revenue and all taxpayers bear the costs. However, the income transfer brought about by a minimum wage causes employers of unskilled workers to bear the brunt of the burden. (Some of this, as mentioned above, is passed on to consumers.)

So, are minimum wage laws even effective or, for that matter, even fair? A more targeted approach to helping the working poor seems more appropriate. The Earned Income Tax Credit, for example, gives unskilled Americans the incentive to be productive members of society and ending minimum wage laws would allow more of them to do so. In addition, according to the Bureau of Labor Statistics, half of minimum wage earners are aged 25 or less. The majority of these aren’t even the working poor that the minimum wage is intending to help.

The minimum wage is a feel-good policy that politicians use to show how they are helping poor people. And they don’t even have to raise taxes to do it! Many people have bought into the feel-good argument, but haven’t considered the drawbacks.

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